Optimal Annuity Portfolio Under Inflation Risk

22 Pages Posted: 6 Sep 2014 Last revised: 29 Dec 2018

See all articles by Agnieszka K. Konicz Bell

Agnieszka K. Konicz Bell

Independent

David Pisinger

Technical University of Denmark - Management Engineering

Alex Weissensteiner

Free University of Bolzano Bozen

Date Written: September 5, 2014

Abstract

The paper investigates the importance of inflation-linked annuities to individuals facing inflation risk. Given the investment opportunities in nominal, real, and variable annuities, as well as cash and stocks, we investigate the consumption and investment decisions under two different objective functions: 1) maximization of the expected CRRA utility function, and 2) minimization of squared deviations from an inflation-adjusted target. To find the optimal decisions we apply a multi-stage stochastic programming approach. Our findings indicate that independently of the considered objective function and risk aversion, real annuities are a crucial asset in every portfolio. In addition, without investing in real annuities, the retiree has to rebalance the portfolio more frequently, and still obtains the lower and more volatile real consumption.

Keywords: Inflation-linked annuity, Retirement planning, CRRA utility, Loss disutility, Multi-stage stochastic programming

JEL Classification: C44, D14, D91, G11, G23, J26

Suggested Citation

Konicz Bell, Agnieszka K. and Pisinger, David and Weissensteiner, Alex, Optimal Annuity Portfolio Under Inflation Risk (September 5, 2014). 2015, Computational Management Science: 12(3):461-488. Available at SSRN: https://ssrn.com/abstract=2492022 or http://dx.doi.org/10.2139/ssrn.2492022

Agnieszka K. Konicz Bell (Contact Author)

Independent ( email )

No Address Available

David Pisinger

Technical University of Denmark - Management Engineering ( email )

Produktionstorvet 424
room 043
Kgs. Lyngby, 2800
Denmark

Alex Weissensteiner

Free University of Bolzano Bozen ( email )

Universitätsplatz 1
Bolzano, 39100
+39 0471 013496 (Phone)

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